Reporting the Unemployment Exclusion

As discussed in our post on March 11, 2021, the American Rescue Plan, which was enacted on March 11, 2021 provides a retroactive exclusion for unemployment benefits received during 2020 (up to $10,200 per taxpayer).

The exclusion is available for taxpayers with adjusted gross income of under $150,000.  When computing income for the purpose of this threshold, include all unemployment benefits received (before applying the exclusion).  Update: As of March 23, 2021, the IRS changed its instructions to indicate that unemployment benefits are not included when determining if a taxpayer’s income is under the $150,000 threshold.

The IRS recently released updated instructions for Form 1040, indicating that the full amount of unemployment benefits will still be reported on the line for unemployment compensation, which is line 7 of Schedule 1 of Form 1040, Additional Income and Adjustments to Income.  The exclusion of unemployment benefits will be separately reported on line 8, for other income, and it will be shown as a negative amount marked with the code “UCE” for unemployment compensation exclusion. 

It will take time before tax software is updated to reflect this change, and it will also take time before we know if states will conform to the federal exclusion.  In the meantime, practitioners should consider putting affected clients on extension. 

The IRS has urged taxpayers who have already filed their 2020 income tax returns not to file amended 2020 returns to claim the exclusion until it issues further guidance.

The IRS revision to the 1040 instructions is available at: https://www.irs.gov/faqs/irs-procedures/forms-publications/new-exclusion-of-up-to-10200-of-unemployment-compensation